SBA Loans: Myths and Realities

By understanding what the Small Business Adminstration does and doesn't do, business owners can be in a better position to take advantage of this often misunderstood government program.

Entrepreneurs often shun SBA-backed loans because of a range of misconceptions. Here are 6 Common Myths about SBA loans:

1. The SBA oversees a pool of free money. Business owners often go to the SBA looking for free money, which is not what the Administration is about. People are expected to pay loans back. The agency also expects people to put up some collateral, although a lack of collateral in and of itself is not grounds to turn down a loan. The SBA guarantees loans based on factors common to any credible lending institution: a well-thought-out business plan, management experience, good character, and an owner's willingness to take a stake in the business, among others.
2. SBA interest rates are too high. The SBA puts ceilings on interest rates. For instance, the maximum rate is prime plus 2.25% for a loan of less than seven years and greater than $50,000. If the term is seven years or greater and for more than $50,000, the maximum is 2.75% over prime. Interest rate tiers are based on the loan's size, and rates are negotiable up to the ceilings.
3. You have to be a business in distress to qualify. A business doesn't have to be failing to get its loan approved. Usually, an SBA-guaranteed loan helps a business owner bridge a gap: a lack of collateral, for example, or the need for an extended loan term.
4. The SBA is only for start-ups. While SBA lenders do make loans to start-ups for the purchase of business assets including the purchase of existing businesses, it's also a great resource for established businesses looking to secure working capital. Some of the biggest borrowers in the SBA's real estate loan program are established dentists and doctors who want to buy offices. The loans are good for fast-growing businesses who need working capital, too.

 

Source: Inc. Magazine